Why Is Nokia Selling Off?

After reaching a low of $1.7 last summer, Nokia (NYSE:NOK) had a nice rally, which carried it nearly to $5 per share. After the last earnings report, Nokia started to take a plunge despite beating the estimates and performing much better than expected. Today, Nokia's share price is down nearly 14% from the peak. Why is this happening and what can change this?

One of the reasons for the sell-off is related to the company's decision of scrapping dividends this year. Although, I completely agree with Nokia's decision, many investors were upset with it. There were a lot of investors of all sizes who kept Nokia for its nice dividend yield, and many of these investors decided to sell their shares after the company's announcement regarding the dividends. Many investors don't realize that dividends are a way for companies to share their income with investors. If a company had no income, it has nothing to share with investors. If canceling out dividends is important for a company's survival, I would much rather the company to do that than keep paying out dividends and shooting itself in the foot.

The second reason for the sell-off could be the short interest. Currently, short interest is near all-time high for Nokia where 312 million of the company's shares are shorted. Given the company's daily average volume of 56 million, it may take up to a week for the shorts to cover their positions, which may lead to a strong rally for the company's share price. A lot of the shorting might be simply due to the massive stock price appreciation Nokia has seen in the last six months. I am sure there are a lot of shorters who think that the share price has rallied too much and too fast. Of course this doesn't mean that all shorters are based on technical indicators alone, even though a lot of them are.

Also, in the last few months, there were a lot of investors who sold off stocks like Apple (NASDAQ:AAPL) and bought Nokia because they saw the tides changing. Now, a lot of these investors must be taking profits and looking for other ships to jump to. Profit taking is definitely plausible at the moment because Nokia's share price appreciated very nicely in the last few months and this is very typical.

Fourth, there are also many investors who are concerned with the company's fundamentals. While the supply chain issues explained most of this, the company was able to sell only 4.4 Lumias. Obviously Nokia needs to sell a lot more copies than that if it wants to stay profitable in the long term. We have no way of knowing how many Lumias would be sold in the quarter if Nokia was able to meet all the demand.

Together, these four reasons can explain why Nokia has been falling in the last couple weeks. Nokia can reverse this trend once again if it demonstrates that it can sell far more Lumias and Ashas in 2013 than it did in 2012. Now that most of the supply issues are dealt with, Nokia will have to bring the demand up and sell a lot of phones. Last year, Nokia had to sell its headquarters and some other assets in addition to raising new debt in order to generate some cash. This year, the company will have to raise cash through its operations. If Nokia can do this, not only will it be able to start paying dividends and buying back shares again, but it will also see a significant price appreciation.

For the time being, the sell-off might continue for a little bit more, but that doesn't worry me too much. I keep writing covered calls on my shares in order to bring my average breakeven price lower in order to minimize the risks and maximize the profits. Many of the investors who sell Nokia based on fundamental fears seem to forget that Nokia has a partnership with China's largest mobile phone company China Mobile, which includes subsidies for Lumia 920T. This should help Lumia sales greatly.

For Nokia, there is still a lot of work to do and a lot of road to travel. Just because the company turned a profit in the last quarter doesn't mean that the restructuring process has come to a conclusion. Nokia's transition will not be over until it is able to sell enough Lumias and Ashas to offset the massive market share loss caused by the Symbian devices. Until Nokia reaches a market share about 10% in the smartphone market, it is difficult to talk about successful transition in the company.

Now, what do investors do with this information? Those who bought Nokia at prices above $5 can sell covered calls to bring their breakeven price down. Those who bought Nokia at prices around $3-$4 per share can hold onto their shares and wait until the shares move out of the $3-$5 range. Those who bought Nokia at prices below $2 can take some profits and come back in a few weeks when the sentiment on the company is more positive again. At the end of the day, this is your decision and you should be able to tell how much faith you have in the company. So far there hasn't been anything that gave me the impression that Nokia's turnaround story is anything but intact. On the other hand, investors need to be patient because good investments usually show themselves over a long period of time.

Disclosure: I am long NOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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